Shareholders to reject current merger plan

Glencore is under pressure to improve its offer to buy the 66 per cent of Xstrata is does not already own after two of Xstrata’s largest investors vowed to reject the $US90 billion merger proposal.

The shareholder revolt began shortly after the deal was announced with a statement by David Cumming, head of equities at Standard Life Investments. He said he intended to vote against the merger terms unless they were “materially improved" for Xstrata investors.

“Although we see some merit in the merger of Xstrata and Glencore the proposed exchange ratio clearly undervalues Xstrata’s assets and future earnings contribution," Mr Cumming said.

Richard Buxton, head of UK equities at another fund manager, Schroders, said he would also vote the deal down unless the terms for Xstrata investors were improved.

“This is a fabulous deal for Glencore, it’s probably a great deal for the Xstrata management, but it’s a poor deal for Xstrata’s majority shareholders," he told Reuters.

The all-share deal would combine Glencore, the world’s most successful commodities trader with businesses in 40 countries with Xstrata, the fourth-biggest miner which holds dominate shares of the markets for thermal coal, copper and zinc.

“It’s a story that no other mining company can tell you, of operations and offices right across the globe in every single significant sphere which maps the trade flows and matches the opportunities to develop production."

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Timothy Huff, an analyst at Royal Bank of Canada said although Xstrata investors who also held Glencore shares were likely to support the deal there were enough Xstrata-only investors to block it unless they were given a better offer.

“The deal won’t fall apart, they’ll make the deal work but there is an increased chance they will revise the terms," he told the Financial Review’s ResourcesDaily.

Under the proposed merger, investors in Xstrata will receive 2.8 Glencore shares for each Xstrata share. The companies said this represented a premium of 15.2 per cent over Xstrata’s closing share price on February 1 when news of the merger first broke.

However that calculation is based on Glencore’s shareprice at the close of Monday. Taking the value of Glencore shares as on February 1, the premium shrinks to 8 per cent. Mr Huff described this as being on “the low side".

Richard Knights, an analyst at boutique investment bank Liberum, said while the early shareholder resistance suggested the deal’s chances under the current terms were “questionable" it remained a sensible proposal for Xstrata investors. He estimated the ratio of 2.8 Glencore shares to each Xstrata share would increase Xstrata investors’ share of the combined group’s earnings by 27 per cent and dilute Glencore’s by 6 per cent after assuming the companies’ target of $US500 million in synergies.

“The ratio makes sense," he said. “But I think there’s a lot of Xstrata shareholders who love their Xstrata. For some they don’t feel the premium is high enough and for others they would rather not own assets in Kazakhstan and the Democratic Republic of Congo." Glencore has mining operations in both countries.

The two fund managers who have already spoken against the deal hold a combined 3.6 per cent of Xstrata. The merger, to be done through a scheme of arrangement, needs support of 75 per cent of shareholders of both companies. Because Glencore, which already owns 34 per cent of Xstrata, is barred from voting, the deal can be blocked by just 16 per cent of Xstrata’s shareholders.

The release of the deal coincided with Xstrata’s full-year results, headlined by a 12 per cent rise in profit to $US5.8 billion. At a lunch time briefing of analysts, Mr Davis kept the discussion to his company’s results and steered questions away from the merger plan.

Both companies have major operations in Australia and the merger will need approval from the Foreign Investment Review Board. Mr Davis told analysts he did not expect the FIRB process to be “excessively taxing".

Regulators in other countries are expected to examine the merger’s competition implications with the combined firm controlling about 30 per cent of the internationally traded thermal coal market and almost 25 per cent of the global market in zinc.

A spokesperson for Joaquín Almunia, the European Commission’s competition commissioner said no comment could be made as the merging parties were yet to file any application.